NEW YORK - A federal court in Wisconsin on Friday again threw out the Internal Revenue Service case against Ambac Assurance Corp.
The action makes it increasingly likely the bond insurer will retain $700 million of tax refunds regardless of whether the IRS believes it is entitled to take them back.
The IRS claims that Wisconsin-based Ambac — which had $313 million of cash in the middle of 2010 and whose parent is bankrupt — has obtained a “completely unprecedented” order from state courts that prevents the agency from retrieving federal taxes.
The IRS told the federal court on Feb. 11 that state courts “lacked any jurisdiction, authority, or right” to rule on internal revenue laws and called the orders “null and void as a matter of federal law.”
The federal court disagreed.
Federal District Court Judge Barbara Crabb dismissed the IRS case on grounds that it “lacked jurisdiction to consider the legality of a state court’s order made in the context of an insurance rehabilitation proceeding.”
Crabb said the principles of federalism stipulate that federal courts should abstain from interfering with specialized regulatory schemes. The judge called the IRS claims “disruptive” to the state’s rehabilitation proceedings, which she said have a right to provide strong protection to policyholders.
The case pits the IRS against Ambac, the Wisconsin insurance commissioner, and the Dane County court which made the unprecedented ruling. The decision and court filings are posted at Ambacpolicyholders.com.
Crabb’s 11-page decision is consistent with her ruling from one month ago when she opined that the federal court lacked jurisdiction to decide the motion and moved the case back to state court. The IRS was seeking to dissolve a state ruling that prohibits it from initiating a lawsuit against Ambac and preventing it from placing a lien on the insurer’s assets.
If the IRS decides the tentative tax refund given to Ambac was improper, it can make a claim in the rehabilitation proceedings. Its claims would be cordoned into the segregated account — a walled-off account established by the commissioner last March — that holds roughly $60 billion of Ambac’s riskiest assets.
